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3 Estate Planning Issues For LGBTQ+ Couples—Part 2

Whether you are married or not, if you are involved in a committed partnership with another individual, estate planning is about so much more than planning for death—it’s about planning for life and ensuring your beloved will be protected and provided for no matter what happens to you. And if you are a member of the LGBTQ+ community, estate planning is even more critical, especially if you have complex family relationships.

Although same-gender marriage is legally recognized in all 50 states, long-held prejudice at both the political and family level continues to create complications for both married and unmarried same-gender couples. Indeed, while the federal government recognizes same-gender marriage, there are plenty of cities, businesses, and people who still refuse to recognize these unions. Moreover, a recent survey found that roughly four of every 10 LGBTQ adults say they have been rejected by a family member because of their sexual orientation or gender identity. As we discussed last week in part one, such discrimination can create unique estate planning challenges, and regardless of your marriage status, if you are an LGTBQ adult in a committed partnership, you should be aware of several issues that can affect your planning strategies. Specifically, we discussed how relying on a will alone may not provide sufficient protection for your partner/spouse, and we explained why incapacity planning is particularly crucial if you want your partner/spouse to have a say in your medical treatment and the ability to access and manage your assets in the event you are hit with a debilitating illness or injury. 

 

Here we’ll address the final issue you should be aware of when creating your estate plan—securing parental rights for the non-biological parent of minor children.

  1. Estate Planning Offers Alternative to Adoption
    Although married same-gender couples now enjoy nearly all of the same rights as opposite-gender couples, there is one key right that’s still up in the air—the automatic right to be legal parents. While parental rights are of course automatically bestowed upon the biological parent of a child, the non-biological spouse/parent still faces a number of challenges when it comes to obtaining full parental rights.

    Since the Supreme Court has yet to rule on the specific issue of the parental rights of the non-biological parent in a same-gender marriage, there is a tangled, often contradictory, web of state laws governing such rights. If you are a married same-gender couple, for example, some states consider the non-biological partner a legal parent based solely on your marriage, while other states do not.

Given the conflicting nature of state laws, many same-gender couples have turned to second-parent adoption to gain parental rights for the non-biological parent, since the Supreme Court has ruled that the adoptive parental rights granted in one state must be respected in all states. However, it can be extremely difficult for same-gender couples to adopt. In fact, 11 states currently permit state-licensed adoption agencies to refuse to grant an adoption, if doing so violates the agency’s religious beliefs. In other states, the law specifically forbids such discrimination, but given the Supreme Court’s ruling last week in Fulton v. City of Philadelphia, even those laws are susceptible to legal challenge.

In that case, the city canceled a contract with Catholic Social Services (CSS), a taxpayer-funded, faith-based foster care and adoption agency, after it refused child placement with LGBTQ families in violation of a city law prohibiting anti-LGBTQ discrimination. CSS sued the city, arguing that requiring it to follow the nondiscrimination policy violated its free exercise of religion since working with same-sex couples would go against its religious opposition to homosexuality.

In a unanimous judgment, the Supreme Court ruled in favor of CSS and found Philadelphia’s contract with CSS to be unenforceable. However, the ruling was narrowly focused on specific contractual language, and it does not create a broad free-exercise exemption from nondiscrimination laws, as many in the LGBTQ+ community feared. 

That said, the Fulton case and others like it that are sure to follow, demonstrate that when it comes to same-gender couples seeking parental rights, second-parent adoption is not a panacea. Fortunately, same-gender couples do have an alternative to adoption—estate planning. Indeed, using a variety of estate planning strategies, as your Personal Family Lawyer®, we can provide a non-biological, same-gender parent with nearly all parental rights, even without formal adoption.

Starting with our Kids Protection Plan®,  LGBTQ couples can name the non-biological parent as the child’s legal guardian, both for the short-term and the long-term, while confidentially excluding anyone the biological parent thinks may challenge their wishes. In this way, if the biological parent becomes incapacitated or dies, their wishes are clearly stated, so the court can do what the parent would’ve wanted and keep the child in the non-biological parent’s care.

Beyond that, there are several other estate planning vehicles—living trusts, power of attorney, and health care directives—we can use to grant the non-biological parent additional rights. We can also create “co-parenting agreements,” which are legal agreements that stipulate exactly how the child will be raised, what responsibility each partner has toward the child, and what kind of rights would exist if the couple splits or gets divorced.

 

Experience You Can Rely On
In light of these issues, it’s vital for LGBTQ+ couples, especially those with children, to always work with experienced estate planning lawyers, and avoid using generic online documents at all costs. As your Personal Family Lawyer®, we have the experience of creating plans specifically designed to prevent your plan from being challenged in court by family members who disagree with your relationship.

Indeed, with the proper planning, we can ensure that no matter what happens to you, your partner and family will be protected and provided for in the exact manner you wish, rather than being stuck in a financial and legal nightmare. What’s more, our specialized planning services can help ensure that non-biological parents in LBGT partnerships have as many parental rights as possible, without resorting to second-parent adoption. Contact us, your Personal Family Lawyer® today to get started with a Family Wealth Planning Session.

This article is a service of Stephanie Hon, Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge. 

3 Estate Planning Issues For LGBTQ+ Couples—Part 1

Whether you are married or in a committed partnership, estate planning is about much more than planning for death—it’s about planning for life. It’s the way to ensure your beloved will be protected and provided for in the event of your death or incapacity. Especially if you are a member of the LGBTQ+ community, estate planning is even more critical.

Although same-gender marriage is legally recognized in all 50 states, long-held prejudice at both the political and family level continues to create complications for both married and unmarried same-gender couples. For example, suppose you have family members who are opposed to your marriage. In that case, your estate plan may be more likely to be disputed or even sabotaged by unsupportive relatives. This could mean that family members are more likely to contest your wishes, or it might result in custody battles over non-biological children in the event of the biological parent’s death.

Unsupportive family members may even try to block the ability of your partner to make medical decisions on your behalf should you become incapacitated by accident or illness. Even worse, your family members could try to kick your partner out of a shared home, if you are in an accident or fall ill, or they may even block your partner from seeing you if you require hospitalization.

Additionally, if you and your partner are unmarried, your partner would have no rights or protections should you become incapacitated or die without any planning in place, which leaves your partner vulnerable to several potentially dire risks.

Given these issues, if you are in a committed partnership, you should be aware of several unique considerations regarding your estate plan. While you should meet with us, your Personal Family Lawyer®, to address your specific circumstances, here are three of the most pressing concerns to keep in mind. 

  1. A Will Alone Might Not Be Enough

Suppose you’re unmarried and die without any estate plan. In that case, your property will be shared with your surviving family members according to your state’s laws through intestate succession. The state’s laws would not protect your unmarried partner, so if you want your partner to receive any of your assets upon your death, you need to—at the very least—create a will.

However, having an estate plan that consists solely of a will often doesn’t provide sufficient protection for your spouse/partner, and we often recommend that same-gender couples—even those who are married—create both a will and a trust. Although a will is a foundational part of nearly every estate plan, for a variety of reasons, having just a will could leave your partner/spouse at risk.

Most importantly, a will does not work in the event of your incapacity, which could happen at any time before your death. Should you become incapacitated with only a will in place, your partner/spouse may not have access to needed funds to pay bills, or they might even be kicked out of your home by a family member appointed as your guardian during your incapacity. 

Furthermore, upon your death, a will is required to go through the often long, costly, and potentially conflict-ridden court process known as probate. In contrast, assets that are properly titled in the name of your trust would pass directly to your partner/spouse upon your death, without the need for probate or any court intervention

If your relationship is not supported by one or both families, avoiding probate is especially important. If a family member doesn’t support your relationship, they are more likely to contest your will during probate.

If your will is successfully contested, this could prevent your surviving partner/spouse from receiving assets you left in your will. The process of contesting is extremely time-consuming, costly, and emotionally draining for your surviving partner/spouse.

Typically, when an attorney drafts your will, it is not set up to protect your assets after they are passed to your partner/spouse from creditors or lawsuits. However, leaving your assets in a trust that your partner/spouse can control would ensure the assets are protected from creditors, future relationships, and/or unexpected lawsuits.

 

  1. Incapacity Planning is Especially Vital

As we touched on earlier, estate planning is not just about planning for your eventual death; it’s also about planning for your potential incapacity due to injury or illness. Proactive estate planning allows you to name the person (or persons) you would want to make your healthcare, legal, and financial decisions for you if you are incapacitated and unable to make such decisions yourself through a medical power of attorney.

If you haven’t planned for incapacity, the choice is then left to the court to appoint the person(s) to make these decisions on your behalf. If you’re unmarried and the court appoints one of your relatives as your guardian, your family could leave your partner totally out of the medical decision-making process and even deny them the right to visit you in the hospital. And even if you are married, it’s not guaranteed that your spouse would have the ultimate legal authority to make such decisions.

Though the court typically gives spouses priority as guardians, this isn’t always the case, especially if unsupportive family members challenge the issue in court. To ensure your partner/spouse has the ability to make these decisions for you, you must grant them the legal authority to do so using medical power of attorney and durable financial power of attorney.

A durable financial power of attorney gives your spouse the authority to manage your financial, legal, and business affairs, including paying your bills and taxes, running your business, selling your home, as well as managing your banking and investment accounts.

In addition to creating a will and trust, be sure to also create a living will, so that your spouse will know exactly how you want your medical care managed in the event of your incapacity, particularly at the end of life. Finally, don’t forget to provide your partner/spouse with HIPAA authorization within the medical power of attorney, so they will have access to your medical records to make educated decisions about your care. 

As your Personal Family Lawyer®, we can support you in putting in place a robust estate plan that will ensure that your partner/spouse has the maximum rights possible if you are ever struck by a debilitating accident or illness.

Next week, in part two, we’ll discuss the final estate planning consideration for LGBTQ couples—securing parental rights for the non-biological parent of minor children


This article is a service of Stephanie Hon, Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge. 

Just Married – 6 Estate Planning Essentials for Newlyweds – Part 1

As we head into the peak of wedding season, if you are a newlywed or are about to tie the knot, add “estate planning” to your do list. And yes, we imagine that at this happiest time of your life, planning for your potential incapacity and eventual death is probably the farthest thing from your mind right now, but getting it handled as part of your wedding planning is the greatest gift you can give your soon-to-be spouse.

First, be aware of the impact of doing nothing. If you were to become hospitalized for any reason prior to your marriage day, the person you love most in the world would not have the legal authority to make your medical decisions and may not even have the authority to see you in the hospital. Your beloved would have no access to your bank accounts and could even be put into a position of having to move out of your shared home abruptly in the event of your death.

If the idea of these potential realities is terrifying to you, call us today to get a “pre-marriage” plan in place, and then, after your marriage, we can update it.

Indeed, once your marriage is official, your relationship becomes entirely different from both a legal and financial perspective. With this in mind, if you’ve recently said “I do” or have plans to do so in the near future, here are six essential items you need to address in your plan.

1. Beneficiary Designations

One of the easiest—and often overlooked—estate planning tasks for newlyweds is updating your beneficiary designations. Some of your most valuable assets, such as life insurance policies, 401(k)s, and IRAs, do not transfer via a will or trust. Instead, they have beneficiary designations that allow you to name the person (or persons) you’d like to inherit the asset upon your death.

You should name your spouse as your primary beneficiary (if that’s your wish), and then name at least one contingent, or alternate, a beneficiary in case your spouse dies before you. And if you have kids, remember to never name a minor child as a beneficiary of your life insurance or retirement accounts, even as a contingent beneficiary.

If a minor is listed as the beneficiary, the assets would be distributed to a court-appointed custodian, who will be in charge of managing the funds until the child reaches the age of majority, at which point all benefits are distributed to the beneficiary outright. 

If you want your child to inherit your life insurance or retirement account, you should set up a trust to receive those assets instead. And if you have significant retirement account assets, you may not even want those assets to go outright to your spouse (or future spouse), but instead, you may want to use a trust to distribute your retirement account assets. If you don’t want your retirement assets to go outright to your named beneficiaries and want them to have the maximum tax advantages, contact us for a Family Wealth Planning Session™.

2. A Will

A last will and testament allow you to designate who should receive your assets upon your death. If you are newly married, you likely want your spouse to receive most, if not all, of your assets, and if so, you should name him or her as the primary beneficiary in your will.

Although your spouse would likely inherit all of your assets should you die without a will, known as dying intestate, depending on state law and whether or not you have children, your assets may not get divided according to your wishes, so it’s always a good idea to create a will (or update your old one) when you get married. And to ensure that your will is created and executed properly, you should always work with trusted legal counsel like us, and never rely on generic, fill-in-the-blank documents you find online.

Trust us—you don’t know what you don’t know here. Online legal document services may be better than nothing for some people, but they may actually be worse than nothing for those who truly want to ensure they’ve considered all of the options. For instance, an online document service cannot help you anticipate and plan for all the potential issues related to your family dynamics and assets that can arise and lead to conflicts and disputes between your loved ones. Yet that’s exactly what you would get when you work with a trusted legal advisor like us and use our comprehensive inquiry process.


Additionally, if you intend to leave assets to someone other than your spouse in your will, or for some reason plan to leave your spouse out of your will, be sure to check our state’s laws governing marital property. In some states, a surviving spouse is entitled to a certain percentage of your assets regardless of what’s in your will. Consult with us, your Personal Family Lawyer®, for clarification on our state’s marital property laws.

 

Finally, although a will is an essential part of nearly every estate plan, as you’ll see below, having a will alone is rarely enough to ensure your spouse and other loved ones stay out of court and out of conflict when something happens to you.

3. A Trust
Upon your death, assets included in a will must first pass through the court process known as probate before they can be transferred to your spouse or any other beneficiary. Probate can take months or even years to complete, and it can even sometimes lead to ugly conflicts between your spouse and other family members. Not to mention, your spouse will likely have to hire an attorney to represent him or her during probate, which can result in significant legal fees that can deplete your estate.

Furthermore, a will only govern the distribution of your assets upon your death. It offers you zero protection if you become incapacitated and are unable to make decisions about your own medical, financial, and legal needs. If you become incapacitated with only a will in place, your spouse would have to petition the court to be appointed as your guardian to manage your affairs.

 

Here’s the bottom line: If your estate plan consists of a will alone, you are guaranteeing your spouse and family will have to go to court if you become incapacitated or when you die.

To avoid the time, cost, and conflict inherent to an estate plan consisting solely of a will, you should consider creating a revocable living trust, along with your will. If your assets are properly titled in the name of your living trust, they would pass directly to your spouse upon your incapacity or death, without the need for any court intervention. 

What’s more, in the terms of your trust, you can even outline the specific conditions that must be met for you to be deemed incapacitated, which would allow you to have some control over your life in the event you become incapacitated by illness or injury. This is in contrast to a will, which only goes into effect upon your death and then merely governs the distribution of your assets. 

Finally, if you are getting married and have minor children from a previous marriage, there is an inherent risk of conflict between your soon-to-be new spouse and your children because your children and new spouse have conflicting interests about what happens to your assets in the event of your death or incapacity. If you want to ensure a lifelong relationship of harmony and ease between your children and your soon-to-be spouse, or new spouse, contact us—we have very specific strategies we can use to support that outcome. 

If you are soon-to-be-married or recently married and anything in this article makes you realize that estate planning isn’t something to put off, but a huge gift to the people you love, contact us to schedule a Family Wealth Planning Session™. This is the first step in considering all of your assets, all of your family dynamics, and getting clear on the right plan, at the right price, for the people you love.

 

Next week, we’ll continue with part two in this series on six estate planning essentials for newlyweds.

 

As your Personal Family Lawyer®, we can guide you to make informed, educated, and empowered choices to protect yourself and the ones you love most. Contact us today to get started with a Family Wealth Planning Session™.
This article is a service of  Stephanie Hon, Personal Family Lawyer®. We do not just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge. 

Don’t Let Diminished Financial Capacity Put your Elder Loved Ones at Risk – Part 2

In the first part of this series, we discussed the early warning signs of diminished financial capacity in the elderly. Here, we’ll discuss planning strategies that can protect your loved ones from incapacity of all kinds.  

With more and more Baby Boomers reaching retirement age each year, our country is undergoing an unprecedented demographic transformation that’s sure to challenge our society in many ways. There’s been lots of talk about whether Baby Boomers will have enough savings for retirement and the strains the generation will put on Social Security and Medicare. 

But there’s another issue that’s getting far less attention—the coinciding increase in the prevalence of dementia.

Along with a swelling senior population, the nation is expected to see a corresponding rise in those suffering from age-related dementia—cases of Alzheimer’s alone are expected to double by 2050. While the cognitive decline from dementia affects nearly every mental function, many people aren’t aware that one of the first abilities to go is one’s “financial capacity.”

Financial capacity refers to the ability to manage money and make wise financial decisions. A decline in financial capacity not only makes seniors more likely to mismanage their money, but also makes them easy targets for financial exploitation, fraud, and abuse.Last week, we listed six warning signs of a decline in a financial capacity. Here we’ll discuss estate planning strategies that can help protect your elderly loved ones and their assets from the debilitating effects of dementia and other forms of incapacity. 

 

Reducing the Risks

Taking steps to reduce the risks of diminished financial capacity is vital, but stepping in to help manage an aging parent’s money without threatening their sense of independence and privacy can be a real challenge. Even if they’re aware of their own impairment, many are reluctant to ask for help, and some may even deny there’s a problem. 

Ideally, you should address the potential for dementia and other forms of incapacity with your senior family members well before any signs of cognitive decline appear. Waiting until they start showing signs of dementia will only exacerbate the complications and could even invalidate planning efforts. 

Start by having a heart-to-heart conversation with your loved ones about the risks involved with incapacity, and how estate planning can help protect them. Approach the subject with care and compassion. Reassure them that your goal is to make certain they retain as much control over their lives as possible—and talking about the issue early on is the best way to do that.

For example, you should let your aging parents know that if they become incapacitated without proper planning, you’ll have to go to court and petition to become their legal guardian. This process is not only quite costly and emotionally taxing but there’s a possibility that the court could appoint a professional guardian, rather than a loved one such as yourself.

A court-appointed guardianship would mean that a total stranger would control all of their affairs—financial and otherwise—which is something they likely wouldn’t want. Professional guardianships also open the door for potential exploitation and abuse by unscrupulous guardians, which is something that’s on the rise given the sharp uptick in the senior population.

However, unless you have the legal authority to make your parents’ financial decisions, your ability to manage their money will be seriously limited. You might be able to work together with them for a while without such authority, but at some point, their cognitive impairment will likely reach a stage where you’ll need to assume full control—and that’s where estate planning comes in. 

 

Put a Plan in Place

The best option would be for your aging loved ones to put in place a comprehensive plan for incapacity as soon as possible. This way, they can choose exactly who they want making their financial, medical, and legal decisions for them if and when they’re no longer able to do on their own. 

There are a number of planning tools that can be used in an incapacity plan, but a will alone is insufficient. A will only goes into effect upon death, so it would do nothing should your elderly parents become incapacitated by dementia. 

While a will is important in planning for death, your parents should also put in place planning tools specially designed for incapacity. One such tool is a durable financial power of attorney. This document would give you (or another person of their choosing) the immediate authority to make decisions related to the management of their financial and legal affairs in the event of their incapacity. 

The downside of financial durable power of attorney is that it sometimes is not accepted by banks and other financial institutions, and you might still end up needing to go to court to get control of your parents’ affairs. 

A revocable living trust is a MUCH better estate planning tool to transfer control of your parents’ financial assets to you without court intervention should they become incapacitated. A revocable living trust, created while your parents have the capacity, can plan for the transition of their assets to your care and control in a way that feels safe and secure to them. Bring your parents to meet with us for a Family Wealth Planning Session to learn more about how this would work. 

Yet having the legal authority to make your parents’ financial and legal decisions is just part of an overall incapacity plan. They’ll also need to put in place planning strategies designed to address their healthcare decisions and medical treatment like medical power of attorney and a living will.  

We can help your aging parents and other senior family members develop a comprehensive incapacity plan, customized with the specific planning vehicles to match their unique needs and life situation.

 

Don’t Wait Until it’s too Late

While incapacity from dementia is most common in the elderly, debilitating injury and illness can strike at any point in life. For this reason, all adults age 18 and older should have an incapacity plan. Moreover, such planning must be addressed well before cognitive decline begins, as you must be able to clearly express your wishes and consent for the documents to be valid. 

Given this urgency, you should discuss incapacity planning with your aging parents right away, and schedule a Family Wealth Planning Session with us to get a plan started. If your senior family members already have an incapacity plan, we can review it to make sure it’s been properly set up, maintained, and updated.

Of course, if you notice any signs of diminished financial capacity or other suspect behaviors, you should immediately contact your Personal Family Lawyer® to address the issue. While there’s no way to prevent age-related dementia and other forms of cognitive decline, make sure your parents and other senior relatives know that they can use estate planning to have control over how their lives and assets will be managed if it does occur.


This article is a service of Stephanie D. Hon, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

Don’t Let Diminished Financial Capacity Put Your Elderly Loved Ones At Risk – Pt 1

With more and more Baby Boomers reaching retirement age each year, our country is undergoing an unprecedented demographic transformation that’s been dubbed “The Greying of America.” This population shift stands to affect many aspects of life, especially your relationships with aging parents and other senior family members.

By 2060, the number of Americans aged 65 and older is projected to nearly double from 52 million in 2018 to 95 million, which will account for 24% of the total population. And as early as 2030, the number of those 65 and older is expected to surpass the number of children (those under age 18) for the first time in history.

Coinciding with the boom in the elderly population, the number of Americans suffering from Alzheimer’s and other forms of dementia is expected to increase substantially as well. The Centers for Disease Control (CDC) estimates that the number of Americans with Alzheimer’s disease will double by 2060 when it’s expected to reach 14 million—more than 3% of the total population. 

 

A Decline in Financial Capacity

Although Alzheimer’s is the most common cause of dementia in older adults, it’s not the only one. In fact, the National Institute on Aging estimates that nearly half of all Americans will develop some form of dementia in their lifetime. And while the cognitive decline brought on by dementia affects a broad array of mental functions, many people aren’t aware that one of the first abilities to go is one’s “financial capacity.”   

Financial capacity refers to the ability to manage money and make wise financial decisions. Yet cognitive decline brought on by dementia often develops slowly over several years, so a diminished financial capacity frequently goes unnoticed—often until it’s too late. 

“Financial capacity is one of the first abilities to decline as cognitive impairment encroaches,” notes the AARP’s Public Policy Institute, “yet older people, their families, and others are frequently unaware that these deficits are developing.”  

Ironically, studies have also shown that the elderly’s confidence in their money management skills can actually increase as they get older, which puts them in a perilous position. As seniors begin to experience difficulty managing their money, they don’t realize they’re making poor choices, which makes them easy targets for financial exploitation, fraud, and abuse.

 

Watch For Red Flags

As you spend time with your aging parents and other senior relatives, this provides an ideal opportunity to be on the lookout for signs that your loved ones might be experiencing a decline in their financial capacity. The University of Alabama study “The Warning Signs of Diminished Financial Capacity in Older Adults” identified six red flags to watch for: 

1. Memory lapses: Examples include missing appointments, failing to make a payment—or making multiples of the same payment—forgetting to bring documents or where documents are located, repeatedly giving the same orders, repeatedly asking the same questions.

2. Disorganization: Mismanaging financial documents, and losing or misplacing bills, statements, or other records.

3. Declining checkbook management skills: Forgetting to record transactions in the register, incorrectly or incompletely filling out register entries, and incorrectly filling out the payee or amount on a check.

4. Mathematical mistakes: A declining ability to do basic oral or written math computations, such as making changes.

5. Confusion: Difficulty understanding basic financial concepts like mortgages, loans, or interest payments, which were previously well-understood.

6. Poor financial judgment: A new-found interest in get-rich-quick schemes or radical changes in investment strategy.

 

Managing Diminished Financial Capacity

If you notice your parents or other senior family members displaying any of these behaviors, you should take steps to protect them from their own poor judgment. It’s vital to address their cognitive decline as early as possible, not only to prevent financial mismanagement and exploitation but also to ensure their overall health and safety.

There are several estate planning tools that can be put in place to help your aging parents and other senior family members protect themselves and their assets from the debilitating effects of dementia and other forms of incapacity. In part two of this series, we’ll discuss the specific planning tools available for this purpose, and provide some guidance on how to address this sensitive subject with your elderly loved ones.  

Next week, we’ll continue with part two in this series on protecting your elderly loved ones from diminished financial capacity. 

As your Personal Family Lawyer®, we can guide you to make informed, educated, and empowered choices to protect yourself and the ones you love most. Contact us today to get started with a Family Wealth Planning Session.

This article is a service of Stephanie D. Hon, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

 

 

6 Ways The American Rescue Plan Can Boost Your Family’s Finances – Part 2

Signed into law on March 11th, President Biden’s $1.9 trillion American Rescue Plan Act of 2021 (ARP) is the largest direct-to-taxpayer stimulus legislation ever passed, and it came just in time to save millions of Americans whose unemployment benefits were about to expire. In addition to extending unemployment relief, the ARP provides individual taxpayers and small business owners with a number of other vital financial benefits aimed at helping the country rebound from last year’s economic downturn. 

Of these benefits, you’ve likely already seen one of the ARP’s leading elements—the $1,400 direct stimulus payments, which went to taxpayers, children, and dependents with incomes of less than $75,000 for individuals and $150,000 for joint filers. But beyond the stimulus, the ARP comes with numerous other provisions that can seriously boost your family’s finances for 2021.

To highlight the ways the ARP can impact your family’s bank account, last week in part one of this series, we outlined three of the legislation’s most important elements. Here in part two, we’ll break down three additional parts of the law that stand to boost your family’s finances. To learn about all the full array of benefits provided by the ARP, meet with us as your Personal Family Lawyer®

4. Unemployment Benefits

While Congress extended unemployment benefits in December 2020, those benefits were set to expire in mid-March 2021, but the ARP extends unemployment benefits through September 6, 2021, offering an extra $300 a week on top of regular benefits.

The legislation extends two other federal unemployment programs as well. First, the Pandemic Emergency Unemployment Compensation Program, which provides federal benefits for those taxpayers who’ve exhausted their state benefits, is now available for an additional 29 weeks, and you have until September 6, 2021, to apply.

Next up, the Pandemic Unemployment Assistance Program provides benefits to those who wouldn’t normally qualify for unemployment assistance, such as the self-employed, part-time workers, and gig workers. This program is now available for 79 weeks, and as with the other benefits, you have until September 6th to get signed up. For more information on the Pandemic Emergency Unemployment Compensation Program and the Pandemic Unemployment Assistance Program, contact your state’s unemployment insurance office.

Finally, the ARP makes the first $10,200 in unemployment benefits paid in 2020 tax-free for families making $150,000 or less. Note that the ARP doesn’t provide a different threshold for single and joint filers, so both spouses are entitled to the $10,200 tax break, for a potential total of $20,400, if both spouses received unemployment benefits in 2020.

However, if your unemployment benefits exceed $10,200 in 2020, you’ll need to report the excess as taxable income and pay taxes on the amount over the limit. And if your household income is over $150,000, you’ll need to pay taxes on all of your unemployment benefits.

If you already filed your 2020 return and paid taxes on your unemployment benefits before the passage of the ARP made those benefits tax-free, the IRS plans to automatically process your refund. This means you won’t have to tax any extra steps, such as filing an amended return, to secure the refund. 

5. Student Loan Relief

Under the CARES Act, federal student loan payments were paused until January 31, 2021, but the ARP extends the pause on those payments and collections through the end of September 2021. While Biden has repeatedly stated his support for $10,000 in federal student loan forgiveness, there was no student loan forgiveness included in the final version of the ARP.

That said, the ARP does offer some relief for those federal student loan borrowers who have their debt forgiven under already existing programs. Currently, federal student loan borrowers can enroll in programs that allow forgiveness after 20 or 25 years of on-time payments, but those borrowers have to pay income taxes on the amount that gets forgiven. 

Under the ARP, student loan debt forgiven between Jan. 1, 2021, and Jan. 1, 2026, will be income-tax-free. This means that if the government forgives a portion of your student loans during this period, that amount will no longer be considered taxable income. 

This provision applies to those taxpayers who are enrolled in the Income Contingent Repayment (ICR) plan, which was started in 1993 and requires 25 years of repayment to qualify for forgiveness. However, this benefit does not apply to other federal student loan repayment plans, which require 20 or 25 years of repayment but started in later years.   

Additionally, thanks to the ARP, if you are a small-business owner who has defaulted on your federal student loan or are delinquent in your payments, you can now qualify for a loan from the Paycheck Protection Program (PPP), which received $7.25 billion in additional funding under the ARP. Moreover, Congress recently extended the deadline to apply for a PPP loan from March 31, 2021, to May 31, 2021. For more details or to apply for a loan, visit the Small Business Administration’s PPP website.

6. COBRA Continuation Coverage Subsidy

The ARP provides a 100% COBRA subsidy for up to six months for those workers who lost their health insurance coverage due to involuntary termination or reduction of hours during the pandemic. The ARP also allows for an extended election period for those who would be eligible to receive the subsidy but did not initially elect COBRA as well as those who let their COBRA coverage lapse. 

Employees who are eligible for the subsidy, known as Assistance Eligible Individuals (AEIs), including those eligible for COBRA between November 1, 2019, and September 30, 2021, who is 1) already enrolled in COBRA, 2) those who did not previously elect COBRA, and 3) those who elected COBRA but let their coverage lapse. The subsidy does not apply to those who voluntarily terminate their employment or who are terminated for gross misconduct. 

The ARP COBRA subsidy lasts from April 1, 2021, through September 30, 2021, and it applies to both insured and self-insured plans subject to COBRA, as well as self-funded and insured plans that are not subject to COBRA but are subject to continuation coverage under state law. 

Note that the ARP subsidy is only available to those whose initial COBRA period ends (or would have ended if COBRA had been elected/did not lapse) either during or after this six-month period. The subsidy does not lengthen the COBRA period, which typically expires 18 months after coverage was lost. This means that if an AEI’s 18-month COBRA period begins after April 1, 2021, or ends before September 30, 2021, the subsidy will be shorter than six months.

The AEIs will not receive the subsidy directly from the government. Instead, the AEIs’ COBRA premiums will be considered paid in full during this period, and the employer must pay 100% of the AEIs’ COBRA premiums. From there, the employer will receive a refundable tax credit on their quarterly payroll tax filing. If an employer’s COBRA premium costs for AEIs exceed their Medicare payroll tax liability, they can file to get direct payment of the remaining credit amount.

COBRA beneficiaries who have elected COBRA and are covered under COBRA on April 1, 2021, do not need to enroll to be covered by the subsidy. For AEIs who did not initially elect COBRA or who let COBRA lapse, there will be a special enrollment period during which employers must inform AEIs of this benefit and allow them to elect coverage. This special enrollment period begins on April 1, 2021, and ends 60 days after the delivery of the COBRA notification to the employee.

A New Year Offers New Hope

With 2020 firmly in our rear-view mirror, the economy appears to be on the rebound, and things are slowly getting back to some semblance of normalcy. That said, many families continue to struggle financially, and if this includes you, you may be able to find some relief from the American Rescue Plan. 

While the six elements of the legislation we covered here are among the most popular, there may be other provisions we haven’t touched on that could benefit your personal situation. Watch for upcoming webinars (and even in-person events!) we’ll be hosting to support you in making wise legal and financial choices for your family. Until then, contact us, as your Personal Family Lawyer®, for guidance on your family’s estate planning strategies by scheduling a Wealth Planning Session today.

This article is a service of Stephanie D. Hon, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge. 

 

6 Ways The American Rescue Plan Can Boost Your Family’s Finances – Part 1

Signed into law on March 11th, President Biden’s $1.9 trillion American Rescue Plan Act of 2021 (ARP) is the largest direct-to-taxpayer stimulus legislation ever passed, and it came just in time to save millions of Americans whose unemployment benefits were about to expire. In addition to extending unemployment relief, the ARP provides individual taxpayers and small business owners with a number of other vital financial benefits aimed at helping the country rebound from last year’s economic downturn.

Of these benefits, you’ve likely already seen one of the ARP’s leading elements—the $1,400 direct stimulus payments, which went to taxpayers, children, and nonchild dependents with incomes of less than $75,000 for individuals and $150,000 for joint filers. But beyond the stimulus, the ARP comes with numerous other provisions that can seriously boost your family’s finances for 2021.

To highlight the ways the ARP can impact your family’s wallet, here we’ll break down six of the legislation’s key elements. To learn about all the full array of benefits provided by the ARP, meet with us, as your Personal Family Lawyer®

  1. Child Tax Credit

If you have minor children, the ARP enhances the Child Tax Credit (CTC) in some major ways. Not only does it significantly increase the amount of credit, but it also changes the way you can receive the money.

Under the current CTC, parents can receive a maximum tax credit of $2,000 for each qualifying child under age 17, with $1,400 of that credit being refundable. The ARP increases that credit to $3,000 a year for each child aged 6 to 17 and $3,600 for each child under 6—and both amounts are fully refundable.

Parents who qualify for the full amount of $3,000 or $3,600 per child include single filers earning less than $75,000, and joint filers earning less than $150,000 annually. After this, the credit begins to phase out. However, parents who file singly and earn less than $200,000 ($400,000 for joint filers) could still claim the original $2,000 credit.

In addition to increasing the credit, the ARP also changes the way parents can access the money. Instead of applying the full amount of the credit to your income taxes at the end of the year and possibly getting a refund, you can now opt to receive the credit upfront in monthly payments of $250 per qualifying child or $300 for children under age 6.  

This means you can get half of the credit in the form of monthly cash payments and claim the other half when you file your 2021 taxes in April 2022. If you opt for the monthly payments, the IRS expects to send those out starting in July 2021 and lasting through December 2021. The ARP directs the Treasury Department to create an online portal that allows parents to opt-out of advance payments and report any changes in income, marital status, or the number of eligible children. 

Note that these increases are only in effect for 2021 and will revert back to the original amounts in 2022. However, there’s currently support in both Congress and the White House for making them permanent. Check our weekly blog and IRS.gov for updates to the legislation.

 

  1. Child and Dependent Care Tax Credit

In order to provide financial assistance to those families who pay for child care or care of an adult-dependent, such as an elderly parent, the ARP increases the Child and Dependent Care Tax Credit for 2021—and for the first time, it makes the credit refundable.

For 2021, the ARP provides a tax credit for the expenses associated with the care of qualifying dependents (kids 12 or younger or a disabled adult) for a total of up to $4,000 for one dependent and $8,000 for two or more dependents. This is an increase from the max credit amounts for 2020, which are $3,000 for a single dependent and $6,000 for multiple dependents. 

The IRS allows you to claim a fairly wide range of qualified expenses for such care, including the following:

  • Daycare
  • Babysitters, as well as housekeepers, cooks, and maids who take care of the child
  • Day camps and summer camps (overnight camps are not eligible)
  • Before and after-school programs
  • Nursery school or preschool
  • Nurses and aides who provide care for a disabled dependent 


The ARP also makes more people eligible for the credit by raising the income limit for the full credit from $15,000 to $125,000 per year. Those making between $125,000 and $400,000 are eligible for partial credit.

As an added bonus, the credit is fully refundable for 2021, so you could get a refund for the credit even if your tax bill is zero. However, as with the changes to the Child Tax Credit, these updates are only available in 2021, unless additional legislation is passed.

There are special rules for divorced couples looking to claim the Child and Dependent Care Tax Credit, so if that’s you, meet with us or a financial advisor for support.

 

  1. Earned Income Tax Credit

The Earned Income Tax Credit (EITC) is a refundable tax credit for low- and middle-income workers that are frequently overlooked—and the ARP makes the credit more valuable for many taxpayers in 2021 than ever before. The amount you can claim for the EITC depends on your annual income and the number of kids you have, but people without kids can qualify, too.

For 2021, the ARP revises a number of EITC rules and makes an increased credit available to more childless taxpayers. While in past years, childless filers could only qualify for a relatively small credit, for 2021 the ARP boosts the maximum EITC for those without children from around $540 to just over $1,500.

The legislation also reduces the minimum age for a childless taxpayer to qualify, from 25 to 19, and it also eliminates the maximum age of 65 for the credit, so seniors of any age can qualify, as long as they meet the income requirements. The above changes from the ARP are only for 2021, but the law makes some permanent changes to the EITC as well.

In prior years, you couldn’t qualify for the EITC if you had more than $3,650 in investment income for the year. But thanks to the ARP, starting in 2021, you can have up to $10,000 of such “disqualified” income without losing the EITC, and for 2022 and beyond, this limit will remain and be adjusted for inflation. 

Below are the maximum EITC amounts for 2021, along with the maximum income you can earn before losing the credit altogether.

 

2021 Earned Income Tax Credit

Number of kidsMaximum earned income tax creditMax earnings, single or head of household filersMax earnings, joint filers
0$1,502$15,980$21,920
1$3,618$42,158$48,108
2$5,980$47,915$53,865
3 or more$6,728$51,464$57,414

 

Additionally, just for 2021, you can calculate your EITC using either your 2019 earned income or your 2021 earned income and use whichever number gets you the bigger credit. And don’t worry—if you go with the 2019 number, it has no effect on any of your other 2021 tax calculations. For example, if some or all of your income is from self-employment, using your 2019 income to calculate your 2021 EITC won’t increase your 2021 self-employment tax.

Finally, no matter the year, the EITC is fully refundable. This means you can collect the money even if you don’t owe any federal income tax. That said, calculating the credit can be quite complicated, so if you need a referral to a CPA to support you, please feel free to contact us for our favorite referrals.

Next week, in part two of this series we’ll cover the remaining three ways the American Rescue Plan can boost your family’s finances in 2021.

This article is a service of Stephanie D. Hon, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.

7 Ways To Save Big Money On Your 2020 Taxes—Part 1

2020 was a nightmarish year for many families. But thanks to recent legislation, you could see a silver lining in the form of major tax breaks when filing your income taxes this spring. First up, although it’s technically not a tax break, the IRS announced this week that the deadline for filing your 2020 federal income taxes has been pushed back from April 15 to May 17, 2021, which gives you an extra month to get your tax return handled. 

The postponement applies to individual taxpayers, including those who pay self-employment taxes. But the extension does not apply to the first-quarter 2021 estimated tax payments that many small business owners file. So if you file quarterly taxes, contact your tax advisor now if you haven’t already done so.

Additionally, the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in March 2020 provides individual taxpayers with several hefty tax-saving opportunities, many of which are only available this year. What’s more, President Biden’s new relief package, known as the American Rescue Plan (ARP), which went into effect in March 2021, not only offers additional stimulus payments to most Americans, but it also includes significant tax relief for those taxpayers who lost their job and had to rely on unemployment benefits in 2020.

While there are dozens of potential tax breaks available for 2020, here are 7 of the leading ways you can save big money on your 2020 tax return. 

  1. Stimulus Payments

As part of the CARES Act, millions of Americans received stimulus checks in 2020, and those payments were an advance refundable tax credit on your 2020 taxes. This means that no matter how much you owe (or get back) on your 2020 taxes, you get to keep all of the stimulus money and won’t have to pay any taxes on it.

Because the IRS didn’t have everyone’s 2020 tax returns when they issued the stimulus checks, they based the stimulus payments on your 2018 or 2019 returns, whichever one you had most recently filed. Using data from those years, the stimulus payments from 2020 phased out at an adjusted gross income (AGI) of $75,000 to $99,000 for singles and at $150,000 to $198,000 for married couples filing jointly.

Given that the stimulus payments were based on your AGI for 2018 or 2019 but technically apply to your 2020 AGI, you may find that your payment was either too much or too little. But there’s good news—even if your financial situation has improved since 2018 or 2019 and you received too much stimulus money based on your 2020 income, you get to keep the overage.

By the same token, if you received too little or only partial payment on your 2020 stimulus, you can claim what you missed in the form of a recovery rebate credit when you file your 2020 taxes. Not sure how this would work? Here are three scenarios where you may be entitled to additional stimulus money.

  • If your AGI for 2018/19 is higher than your AGI in 2020, you can claim the additional amount owed when you file your 2020 taxes this April.
  • If you had a child in 2020 but didn’t get the $500 credit for dependent children in your stimulus payment, you can claim the child when you file in 2021.
  • If someone else claimed the child based on 2018/19 returns, but you can legitimately claim that child on your 2020 return, you can get the $500 tax credit when you file in 2021, and the person who got it based on 2018/19 returns will not have to pay it back.
  1. Unemployment Benefits

When the pandemic stalled out the economy, many Americans lost their jobs and were forced to rely on unemployment insurance to pay the bills. That said, unemployment benefits are generally taxable, so if you took them, without having taxes automatically deducted, you were looking at having to pay income taxes on that money when you file your 2020 return.

However, taxpayers who received unemployment benefits in 2020 were provided with significant relief with the passage of President Biden’s American Rescue Plan (ARP). Under the ARP, the first $10,200 of your 2020 unemployment benefits are tax-free if your annual household income is less than $150,000. The ARP doesn’t provide a different threshold for single and joint filers, so both spouses are entitled to the $10,200 tax break, for a potential total of $20,400, if both spouses received the benefits.

Note that if your unemployment benefits exceed $10,200 in 2020, you’ll need to report the excess as taxable income and pay taxes on the amount over the limit. And if your household income is over $150,000, you’ll need to pay taxes on all of your unemployment benefits just like you would before the passage of the ARP.

If you already filed your 2020 return and paid taxes on your unemployment benefits before the passage of the ARP made those benefits tax-free, the IRS plans to automatically process your refund. This means you won’t have to tax any extra steps, such as filing an amended return, to secure the refund. The IRS will release further details on this issue in the coming weeks.

3. Waived RMDs

You are typically required to take an annual required minimum distribution (RMD) from your IRA, 401(k), or other tax-deferred retirement account starting in the year when you turn 72, but the CARES Act temporarily waived the RMD requirement for 2020. The waiver also applies if you reached age 70½ in 2019, but waited to take your first RMD until 2020, as allowed under the SECURE Act.

RMDs generally count as taxable income, so taking this waiver means that you may have lower taxable income in 2020 and therefore owe fewer income taxes for 2020.

However, there are a number of factors to consider, including the state of the market and your living expenses, when deciding whether or not to waive your RMDs. Given this, consult with us, as your Personal Family Lawyer®, or your tax professional before making your final decision.

Next week, in part two of this, we’ll cover the remaining four ways you can save big money on your 2020 tax bill. 

This article is a service of Stephanie D. Hon, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge. 

Why Estate Planning is a Women’s Issue

A group of wealth strategists at CIBC Private Wealth Management noticed that the women in attendance at educational seminars for client couples were often mum. So, as part of the firm’s Women’s CIRCLE initiative, they started women-only seminars, including one called Finding Your Way. The idea is that if you take an inventory of your financial life, and know a little bit about how the estate administration process works, you’ll be more confident and better prepared to deal with a death in the family.

The surprise: It wasn’t just older women in their 60s and 70s who have been signing up, but Millennial women, wanting to know what they should be doing to manage their own wealth and make sure their parents (especially moms who will generally outlive dads) are in good shape in the event of a death or divorce.

“These concepts are really daunting and quite scary,” says Becky Milliman, a managing director with CIBC Private Wealth Management in Chicago, noting that it takes courage for the less financially sophisticated family member to speak up, and that tends to be the woman.

Here are some top lessons.

Keep a list of trusted advisors. Many of the adult children couldn’t name their parents’ attorney or accountant. You shouldn’t just know their names, you should meet them or at least make a quick introductory phone call. Ditto for financial advisors, bankers, and/or insurance brokers. Keep an updated list with your will. More wealth management firms are rolling out “emergency contact forms” as a backstop for elder abuse. Fill them out.

Use a thumb drive. There were real concerns over digital assets, says Amanda Marsted, a managing director of CIBC Private Wealth Management in New York. Would you know the login information to access your spouse or parents’ accounts? Consider using a password manager, or store password information (and documents) on a thumb drive.

Have the conversation. What if mom or dad (or your spouse) says: “When you need to know, you’ll get the information.” Tell them: You don’t have to share balances, but at a minimum, you should share advisors, bank account numbers, and such. That will prevent much bigger problems down the line.

Keep important documents secure. Are your original wills and trusts at the lawyer’s office? Your real estate deed in your bank safe deposit box? Your insurance policies in one filing cabinet and income tax returns in another? The list goes on: retirement plan statements, birth/marriage certificates, Social Security cards. Make a list of these documents, including where you keep them. “You need to be prepared,” Milliman says.

Plan ahead if you have a family business. If you have a family business, do you have a succession plan in place? In one case, a widow was left with a business her late husband founded that she had no interest in carrying on. Luckily, it turned out to be an opportunistic time to sell, and Milliman helped the widow create a family foundation to minimize taxes from the sale and help her make a difference.

 Source: https://www.forbes.com/sites/ashleaebeling/2018/07/10/why-estate-planning-is-a-womens-issue/#35fdba54536e

New Developments Transform the Role Life Insurance Plays in Your Estate and Financial Planning

Within the past year, a combination of new legislation and the recent change of leadership in the White House and Congress stands to dramatically increase the income taxes your loved ones will have to pay on inherited retirement accounts as well as increasing the income taxes you owe on your taxable investments. However, purchasing life insurance may offer you the opportunity to minimize the effect of these developments.

To this end, if you hold assets in a retirement account, you need to review your financial plan and estate plan as soon as possible to determine if investing in life insurance or some other strategy may offer tax-saving benefits for you and your family. To help you with this process, here we’ll discuss how these new developments might affect the taxes owed by you and your heirs, and how investing in life insurance may help offset the tax impact of these new changes.

The SECURE Act

At the start of 2020, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) went into effect, and the new law effectively put an end to the so-called “stretch IRA.” Under prior law, beneficiaries of your retirement account could choose to stretch out distributions of an inherited retirement account over their own life expectancy to minimize the income taxes owed on those distributions. 

For example, an 18-year-old beneficiary expected to live an additional 65 years could inherit an IRA and stretch out the distributions for 65 years, paying income tax on just the portion withdrawn each year. In that case, the income tax law would encourage the child not to withdraw and spend the inherited assets all at once.

Under the new law, however, most designated beneficiaries of inherited IRAs and similar tax-deferred qualified retirement accounts are now required to withdraw all of the assets from the inherited account—and pay income taxes on those withdrawals—within 10 years of the account owner’s death. Those who fail to withdraw funds within the 10-year window face a 50% tax penalty on the assets remaining in the account.

But this is just the first development that stands to affect the amount of taxes your heirs might face in the near future on inherited investments.

Democrats Take Control

As we highlighted in a previous article, the recent election of Joe Biden as President and subsequent Democratic takeover of the Senate will likely result in the passage of new tax legislation that could have a significant impact on your family’s financial and estate planning considerations. 

Specifically, it’s likely that within the next two years Democrats will pass legislation aimed at eliminating many of the tax cuts enacted through the 2017 Tax Cuts and Jobs Act. As part of this legislation, we’re expected to see significantly lower federal estate tax exemptions, the elimination of the step-up in cost basis on inherited assets, as well as an increase in the top personal income and capital gains tax rates. 

One way you may be able to minimize the new taxes on both your tax-deferred retirement accounts and taxable investments is by investing in cash-value life insurance. Let’s break down exactly what this strategy might look like.

The New Role of Life Insurance In Your Estate and Financial Planning

Given the new distribution requirements for inherited IRAs, you should consider whether it makes sense to withdraw funds from your retirement account now, pay the tax, and invest the remainder in cash-value life insurance. From there, you can access the accumulated cash-surrender value of the life insurance policy income-tax-free during your lifetime via tax-free withdrawals and/or loans. And upon your death, the death benefit of your life insurance policy would be income-tax-free for your heirs.

By annually investing what you would otherwise put into tax-deferred retirement accounts into a cash-value life insurance contract, or by taking taxable withdrawals from your tax-deferred retirement accounts over time and reinvesting them in cash-value life insurance, you can effectively move these funds into a tax-free, rather than tax-deferred, investment vehicle.

This strategy could not only minimize the income taxes you pay over your lifetime, but it could also significantly reduce the tax bill imposed on your designated beneficiaries after your death since life insurance proceeds are income-tax-free.

Additionally, by investing a portion of your investable assets in cash-value life insurance, you can offset the effects of the proposed loss of income tax basis step-up upon your death, which we’re likely to see enacted through Democrat-backed legislation. What’s more, this strategy would also minimize your current income taxes on what otherwise would have been taxable income from your investments, as growth on investments inside a life insurance policy is not subject to income tax, including any capital gains.

Finally, if you stand to be affected by the proposed decrease of the federal estate tax exemption, which is currently set at $11.7 million, by placing the life insurance policy inside an irrevocable life insurance trust, you can remove the death benefit paid out to your beneficiaries from your taxable estate. In doing so, you would still be able to access the cash value of the insurance policy during your lifetime, either via a so-called “spousal access trust,” if you are married, or via a traditional irrevocable life insurance trust, if you are not married. 

Rethink Your Planning

Although the SECURE Act and the proposed new legislation stand to have an adverse effect on the tax consequences for your retirement and estate planning, investing in life insurance may offer you a valuable tax-saving opportunity. That said, you can only take advantage of this opportunity if you plan for it.

If you fail to revise your plan to address the SECURE Act’s new requirements and/or the proposed legislation that’s likely to be passed by the Democratic administration, you and your family could face a significantly higher tax bill. To prevent this from happening, schedule a Family Wealth Planning Session™ or an existing estate-plan review today.

With us as your Personal Family Lawyer®, we’ll work with you and your financial advisor to analyze all of the ways your retirement accounts might be impacted by the SECURE Act and the new proposed legislation and come up with the most effective planning strategies for passing your assets to your loved ones in the most tax-advantaged manner possible, while ensuring your current tax liabilities are similarly minimized. To learn more, contact us right away.

This article is a service of Stephanie D. Hon, Personal Family Lawyer®. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session™, during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge. 

 

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